Specification Testing of Markov Switching Models*

Robert Breunig, Serinah Najarian and Adrian Pagan

Oxford Bulletin of Economics and Statistics, 2003, vol. 65, issue s1, 703-725

Abstract: This paper proposes a set of formal tests to address the goodness‐of‐fit of Markov switching models. These formal tests are constructed as tests of model consistency and of both parametric and non‐parametric encompassing. The formal tests are then combined with informal tests using simulation in combination with non‐parametric density and conditional mean estimation. The informal tests are shown to be useful in shedding light on the failure (or success) of the encompassing tests. Several examples are provided.

Date: 2003
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